Good Morning,
Before diving into the opportunities, and there are some interesting ones, let’s take a look at a few fundies, primarily weather.
The southwest will finish the week hot; it was 107 in Phoenix yesterday, then drift into a state of never-ending climatology. Fourth of July is over, and so are this hub’s fireworks.
At best, the state is reasonable, though we did highlight a string of days in San Jose that are below normal. That chart isn’t a “sky is falling” forecast, but it’s not an OMGer either.
The party is winding down at the MidC, too, as the region becomes mired in climo in the load center cities.
In sum, weather doesn’t get cold but does come off across the entire WECC and so shall loads with cash following. Before we go to the Qs, let’s look at the how the book has behaved.
Position Report
Mark To Market
Clearly, the BOM HL is too long given the dismal weather; the position did capture some strong spot prices and the combined Aug (HL and LL) earned over a million; we aren’t pigs and wish to bank that. Let’s see how BOM has traded:
Everything is off, but that’s alright because the positions got paid. Given that we put the length on to capture the heat, and now the heat is gone, we are going to liquidate the entire BOM position, except we’ll leave on 75 MW of SP|MC HL spread.
Quarters
ADMIN NOTE: all of the charts will use heat rate when looking at Qs; in fact, I might switch all of APT ranking to use heat rate (currently uses power price) as that metric is a better measurement of market change.
Outrights
As we are still working through how to present our Trade Recs, you’ll see some changes in the presentation today. A red triangle means this is a trade recommendation, so we have three outrights. The others are worthy of looking at, but we are passing on those. Also, each derivative will include both HL and LL.
The Q2 18 Palo is at, or near, a contract high off of sympathy with the firm June prices. Looks like a good short, except it has been range-bound for the last few weeks, though that makes it more appealing as it hasn’t been able to break out higher. We see fair value around 10k, and all it will take is some weak Q4 cash to get paid.
Short Q218 Palo HL
Wierd market move in April, and now is range-bound at those new levels. Most of the crash can be explained by last winter’s low-level snow melt in Feb and March; are you betting you’ll see that 1 in 20-year event again in 2019? Yours.
Buy Q1 19 MidC LL
The SP Q3 LL hit a contract high a few weeks back, and now the market is having second thoughts on that valuation, so are we.
Short Q318 SP LL
ON vs Off Peak
This product was stupid cheap a week ago, still is cheap.
Buy Q418 NP OnOff
Just the opposite sentiment here, the HourType spread is at a contract high and can’t come up with a reason for this, so we’ll
Short Q119 SP OnOff
Not as compelling, chart-wise, as the other two, but if you’re looking for a good entry point to get long the Q418, this seems like a low-risk trade. We’ll pass, we already did a few onoffs.
Time Series Rolls
Not as cheap as it was in June, but off a lot from July, and its most attractive attribute is safety. We’d trade it from the long-side but will pass.
Can’t pass on this, the four has been battered relative to the three, mainly because the three has been so strong off of recent heat. Caught a double bottom and is rallying, we’ll jump on.
Buy Q418, sell Q3 18 SP LL
Excellent volatility, someone made a fortune, or not, now the product is just off its high, and the market is wondering how it got there. Well, it got there off of the massive WY17 hydro energy and doubt you see the same in 2018.
Short Q418, buy Q3 18 NP LL
Locational Spreads
The market hates Palo, loves SP long time. Contract high might want to wait until the blunder is universally realized. The trade could blow out more when the Santa Anas hit, but how much more?
Buy Q417 Palo, Sell Q417 SP LL
The market is expecting another low-level snow melt at MidC in Feb and Jan, just like last year … yeah right. Maybe MidC doesn’t get any snow this year, maybe MidC is colder than Siberia this year (probably not); lots of maybes, but one maybe we don’t see happening is a reenactment of last year.
Sell Q118 SP, Buy Q118 MidC LL
Similar trade, SP-MC LL, and we’d only do one; since we put on the Q1, we’ll pass on the Q2, though we like it just as much.
Contract lows rendering it a buy, but don’t like that the forecast has fallen in sympathy, would prefer seeing some delta. Pass.
Now that is a bizarre chart; in less than four weeks the heatrate has increased 3X. Now that it has plateaued we’d be comfortable shorting. One caution, we are shorting everything SP and would love to find a way to get long, somewhere, at SP, but can’t. Another warning, late LA heat will hurt this trade and there is a good chance we’ll see that, but with prices so high, who cares?
Sell SP Q3 LL, Buy PV Q3 LL